Persistently high debt ratios in advanced economies and emerging fragilities in the developing world cast clouds on the global fiscal landscape. In advanced economies, with narrowing budget deficits, the average public debt ratio is expected to stabilize in 2013–14—but it will be at a historic peak. At the same time, fiscal vulnerabilities are on the rise in emerging market economies and low-income countries—on the back, in emerging market economies, of heightened financial volatility and downward revisions to potential growth, and in low-income countries, of possible shortfalls in commodity prices and aid. Strengthening fiscal balances and buttressing confidence thus remain at the top of the policy agenda. Against that backdrop, this issue explores whether and how tax reform can help strengthen public finances. Taxation is always a sensitive topic and is now more than ever at the center of policy debates around the world. Can countries tax more, better, more fairly? Results reported in this issue show that the scope to raise more revenue is limited in many advanced economies and, where tax ratios are already high, the bulk of the necessary adjustment will have to fall on spending. In emerging market economies and low-income countries, where the potential for raising revenue is often substantial, improving compliance remains a central challenge.

Senate Majority Leader Harry Reid leaves the Capitol building after Republicans and Democrats fail to find a compromise in a rare Sunday session to hammer out a budget deal to reopen the government, which has been partially shut down for two weeks. Photo: Getty

15.31 US stocks are not the only ones affected by the US impasse, but the approaching US debt deadline has until now failed to overly alarm markets.

In London, the benchmark FTSE 100 stayed just in the green with shares up 0.05pc to stand at 6,467.37 points in afternoon trading.

Frankfurt's DAX 30 fell 0.21pc to 8,706.47 points and the CAC 40 in Paris lost 0.27pc to 4,208.37.

Adding to selling pressure was a disappointing batch of Chinese economic data, while on the corporate front shares in French car giant Peugeot dived.

15.04 Aside from the US, a report out by Paris-based OECD has said that inflation in the G20 countries fell to 3pc in the 12 months to August, down from 3.2pc.

India and Argentina had the highest annual inflation rates (equal to or above 8pc) in August 2013, while Japan, France, Canada and Italy had the lowest annual inflation rate (between 0.9pc and 1.2pc).

Annual inflation slowed in Turkey (to 1.5pc, down from 2.0pc), the United States (to 1.6pc, down from 1.9pc), Germany (to 1.5pc, down from 1.7pc), and more moderately in the European Union (to 1.5pc, down from 1.7pc), Brazil (to 6.1pc, downfrom 6.3pc), India (to 10.7pc, down from 10.8pc) and China (to 2.6pc, down from 2.7pc).

In contrast, annual inflation picked up in Indonesia (to 8.8pc, up from 8.6pc) and Japan (to 0.9pc, up from 0.7pc).

It remained stable in the Russian Federation (at 6.5pc), South Africa (at 6.4pc), Mexico (at 3.5pc), and Italy (at 1.2pc).

Source: OECD

14.45 Congress won't be too phased by the fall in markets according to this strategist.

The Dow Jones is down 0.29pc, the S&P 500 is down 0.38pc and the Nasdaq is down 0.66pc.

14.25 Goldman Sachs thinks the shutdown will have shaved 0.5pc off GDP, which would knock the US's Q4 growth estimate down to 2pc.

In the note Goldman says:

From October 1-4, we believe the shutdown probably reduced federal compensation by roughly $400mn per day. We would expect the non-compensation aspects of the initial stage of the shutdown to have been very modest. Overall, the first four business days of the shutdown probably reduced growth by 0.16pp.

The shutdown has now lasted a second week, but the incremental effect should be smaller. The Department of Defense has brought most of its employees back to work, leaving 450k federal employees still out of work, and thus reducing the effect on federal compensation to $225mn per day. We would expect a small reduction in services-related consumption as well. After the second week of shutdown, we believe the cumulative reduction in Q4 real GDP growth amounts to 0.28pp (Exhibit 2).

…

If a longer-term resolution can be reached over the coming days, we would expect the downside risk from the fiscal debate to be limited to about 0.5pp in Q4, compared to our current growth forecast of 2.5pc.

14.12 The dollar, as it has done throughout the crisis, bore the brunt of the nervousness, shedding 0.3pc against the safer option of the yen to trade at around 98.25 yen.

Lee Hardman, currency economist at BTMU, told Reuters

We think the closer we get to the debt ceiling deadline without an agreement, (the more) dollar/yen will come under intensive selling pressure.

The greenback also slipped 0.3pc against the Swiss franc at 0.9098 francs while the euro rose 0.1pc to $1.3558.

13.57 Gold having a tough day. The precious metal has seen its price slide as the debt ceiling stalemate continues.

Watch what China does with US debt, not what it says By Ambrose Evans-Pritchard Economics Last updated: October 15th, 2013

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So much for the hot rhetoric from Beijing questioning the creditworthiness of US debt and consigning the US dollar to the dustbin of history.

The latest data shows that China's foreign reserves soared by $163bn in the third quarter to $3.66 trillion, one of the biggest jumps ever.

Mark Williams and Qinwei Wang from Capital Economic called the rise "astonishing". They estimate that China's central bank must have bought $70bn of foreign bonds last month in a frantic bid to hold down the currency.

We won't know for a while where the money went, but a big chunk must have gone into US Treasuries. So bear that in mind when you read the Xinhua claims that the US debt ceiling fight "has again left many nations' tremendous dollar assets in jeopardy and the international community highly agonised."

Or when it says:

A new world order should be put in place, according to which all nations, big or small, poor or rich, can have their key interests respected and protected on an equal footing. To that end, several corner stones should be laid to underpin a de-Americanised world.

Talk, talk, talk.

China's soaring reserves expose the truth. (And no, excess reserves are not a sign of strength, they are a sign of a deformed economy). Beijing is not in fact opening up its capital accounts and preparing to let the market decide the exchange rate.

The good news for China is that is no longer an emerging market in any meaningful sense. It was a safe haven during the great summer squall that hit India, Indonesia, Turkey, Brazil, South Africa, Ukraine, Serbia, et al. China did not suffer capital flight. It suffered a surge of very unwelcome capital inflows.

But there is a darker side to this. For all the talk of reform, China still refuses to give up its mercantilist trade policy. It is holding down the yuan to cling onto global market share and protect the wafer-thin margin of its exporters, not always successfully.

I have grave doubts about the new consensus view that China is roaring back. There is a high chance that this will fizzle out. You can see from Simon Ward's money data at Henderson Global Investors that China's money supply has rolled over:

Click to enlarge

Mr Ward's measure of six-month real M1 growth is an early warning for the economy, roughly six months ahead. So it points to a fresh slowdown over the late winter/early spring. Be prepared.

In any case, the recent burst of growth has been driven almost entirely by reverting to the bad old ways of top-down investment in heavy industry, and excess credit (yet again), as both the IMF and World Bank hinted in their latest reports.

The economic "efficiency" of debt has collapsed. Each extra yuan of loans now yields just 0.18 yuan of GDP growth. The credit cycle is played out. Debt has jumped from $9 trillion to $23 trillion in five years, reaching 200pc of GDP. Keeping it going is playing with fire. The experts in Beijing know exactly what this implies, but they can't easily stop it. Political vested interests are at play.

Zhiwei Zhang from Nomura has published a note, "China: Why the Economic Recovery is Unsustainable", citing seven reasons why the latest expansion is unhealthy and doomed to wilt like a failed souffle.

The one that struck me most was the finding in the IMF's Article IV report that China's full fiscal deficit (including local government) was 7.4pc of GDP last year. It was 9.7pc excluding land sales, which should be exclude because that sort of funding is a Ponzi scheme.

This is actually worse than the US, as you can see from the chart below:

This does not mean that the wheels will fall off the Chinese economy. What it does show is how far the Chinese growth model is living on borrowed time. All the low-hanging fruit has been picked.

It will be a much harder slog from now on.

Read more by Ambrose Evans-Pritchard on Telegraph BlogsFollow Telegraph Blogs on Twitter

Fitch could strip America of its prized "AAA" credit rating within weeks, the rating agency has warned, amid heightening fears that the world’s largest economy is headed for a default.

The ratings agency believes the country will raise its $16.7trn debt ceiling in time to ensure it can keep up with interest payments on its soveriegn debt, but said the ongoing political stand-off in Washington was “casting doubt over the full faith and credit of the US” regardless.

If the US does default, Fitch warned it would downgrade American bonds from AAA to B+, the highest rating it will award any security that defaults but is expected to make a “swift full or near recovery”.

American bonds are regarded as the safest government debt in the world, and are often used as an laternative to cash, so any downgrade of this kind would send shockwaves throughout the global system.

On Tuesday morning, politicians in Washington were hopeful of reaching a deal to temporarily raise the debt ceiling and reopen the US government. However, talks quickly fell apart with just one day to go before America is due to breach its borrowing threshold.